95th Congress \ COMMITTEE PRINT [ Committee
2d Session J I I'uixt ijr>-r>l
ENERGY AND THE ECONOMY
(The Economic Impact of Alternative Energy Supply-
PREPARED AT THE REQUEST OF
John D. Dixgell, Chairman
SUBCO^IMITTEE ON ENERGY AND POWER,
INTERSTATE AND FOREIGN COMMERCE
UNITED STATES HOUSE OF REPRESENTATIVES
CONGRESSIONAL RESEARCH SERVICE
LIBRARY OF CONGRESS
APRIL 1978 • ^<=^; ^^\
Printed for the use of the Committees on Interstate and ,For^f9j>^;P^j^lDe^ce,
United States House of Representatives, and Energy and Natural Resources,
Commerce, Science, and Transportation, United States Senate
U.S. GOVERNMENT PRINTING OFFICE
22-673 WASHINGTON : 1978
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
HARLEY O. STAGGERS, West Virginia, Chairman
SAMUEL L. DEVINE. Ohio
JAMES T. BROYHILL, North Carolina
TIM LEE CARTER, Kentucky
CLARENCE J. BROWN, Ohio
JOE SKUBITZ, Kansas
JAMES M. COLLINS, Texas
LOUIS FREY. JR.. Florida
NORMAN F. LENT. New York
EDWARD R. MADIGAN, Illinois
CARLOS J. MOORIIEAD, CaUfornia
MATTHEW J. RINALDO, Nw Jersey
W. HENSON MOORE, Louisiana
DAVE STOCKxMAN. Michigan
MARC L. MARKS, Pennsylvania
JOHN E. MOSS, California
JOHN D. DINGELL, Michigan
PAUL G. ROGERS, Florida
LIONEL VAN DEERLIN, California
FRED B. ROONEY, Pennsylvania
JOHN M. MURPHY, New York
DAVID E. SATTERFIELD III, Virginia
BOB ECKHARDT, Texas
RICHARDSON PRE YE R, North Carolina
CHARLES J. CARNEY, Ohio
RALPH H. METCALFE, Illinois
JAMES H. SCHEUER, New York
RICHARD L. OTTINGER, New York
HENRY A. WAXMAN, California
ROBERT (BOB) KRUEGER, Texas
TIMOTHY E. WIRTH, Colorado
PHILIP R. SHARP, Indiana
JAMES J. FLO RIO, New Jersey
ANTHONY TOBY MOFFETT, Connecticut
JIM SANTINI, Nevada
ANDREW MAGUIRE, New Jersey
MARTY RUSSO, Illinois
EDWARD J. MAR KEY, Massachusetts
THOMAS A. LUKEN, Ohio
DOUG WALGREN, Pennsylvania
BOB GAMMAGE, Texas
ALBERT GORE, Jr., Tennessee
BARBARA A. MIKULSKI, Maryland
W. E, WiLLUMSON, Chief Clerk and Staff Director
Kenneth J. Painter, First Assist anl Clerk
Eleanor A, Dinkins, Assistant Clerk
WiLUAM L. Burns, Printing Editor
Jeffrey H. Schwartz
BRLA.N R. Mora
Ross David Ain
Christopher E. Dunne
WILLL4.M M. KITZMILLEE
Mark J. Raabe
Thomas M. Ryan
Lewis E. Berry, Minority Couruel
Subcommittee on Energy and Power
JOHN D. DINGELL, Michigan, Chairman
CLARENCE J. BROWN, Ohio
CARLOS J. MOORIIEAD, California
JAMES M. COLLINS, Texas
W. IIENSON MOORE, Louisiana
DAVE STOCKMAN, Micliigan
EDWARD R. MADIGAN, Illinois
SAMUEL L. DEVINE, Ohio (ex officio)
RICHARD L. OTTINGER, New York
ROBERT (BOB) KRUEGER, Texas
PHILIP R. SHARP, Indiana
ANTHONY TOBY MOFFETT, Connecticut
BOB GAMMAGE, Texas
JOHN M. MURPHY, New York
DAVID E. SATTERFIELD III, Virginia
TIMOTHY E. WIRTH, Colorado
ANDREW MAGUIRE, New Jersey
MARTY RUSSO, Illinois
EDWARD J. MARKEY. Mas.sachusett3
DOUG WALGREN, Pennsylvania
ALBERT GORE, Jr., Tennessee
HARLEY O. STAGGERS, West Virginia
Fbank Ml Potter, Jr., Staff Director and Counsel
Letter of transmittal v
U.S. energy demand, 1950-76 3
The energy scenarios 10
Base case 12
Conservation case 13
High electric case 13
High oil cases 14
Some caveats 14
Economic impacts 15
Employment and unemployment 18
Personal consumption 20
Foreign trade 21
1. Consumption and price of energy, 5-year averages, 1947-76 4
2. Energy consumption by sector, 1950-75 5
3. Electric generating productivity 6-
4. Household ownership — cars and appliances 8
5. Productivity of transportation energy ^
6. Energy productivity indices Id
1. Energy consumption, 1976 and 1990, by case 12
2. Energy supply, 1976-90, by case 15
3. Summary economic impacts, 1976-90 17
4. Employment and unemployment in the United States, 1977-90, by
energy scenario 18
5. Estimated fixed investment by sector, 1976-90, billions of 1972 dollars.. 20-
6. Estimated personal consumption expenditures, 1976-90, billions of 1972
7. Exports and imports, 1990, billions of dollars 21
Appendix — Other energy models 23.
Digitized by the Internet Archive
LETTER OF TRANSMITTAL
The Library of Congress,
Congressional Research Service,
Washington, D.C., February 2, 1978.
Hon. John D. Dingell,
Chairman, Subcommittee on Energy and Power, Committee on Interstate
and Foreign Commerce, U.S. House of Representatives, Washington^
Dear Mr. Chairman: In your letter of March 22, 1977, you asked
that we prepare a study of alternative energy supply scenarios, the
resulting energy prices, and the impact of those scenarios on the U.S.
economy. In fulfillment of that request, I am enclosing a study entitled
''Energy and the Economy." The delay in preparing the report v»'as
necessitated by a shortage of computer funds.
The report evaluates the impacts of five energy cases on the econ-
omy. These include a base case, as well as conservation, high electric
and two high oil cases. The assumptions in each of these cases were
tested for economic impact using the Wharton energy model.
''Energy and the Economy" was prepared by Mr. Alvin Kaufman,
Senior Specialist in Business Economics (Resources and Regulation) ;
Dr. Warren E. Farb, formerly with our Economics Division; and
Ms. Barbara Daly, Research Assistant (Resources and Regulation).
ENERGY AND THE ECONOMY
(The Economic Impact of Alternative Energy Supply-
(By Alvin Kaufman, Senior Specialist in Business Economics (Re-
sources and Regulation) ; Warren E. Farb, Specialist in Macro-
economics ; and Barbara Dal}^ Research Assistant in Resources and
Energy consciousness over the past few years has heightened in the
United States. The President called in April 1977, for the country to
deal with the situation with the fervor of the ''moral equivalent of
war." However, the debate continues in the Congress and elsewhere
as to how this "war" is to be fought. The paths the country has before
it are varied and reflect differing priorities. There are many choices
to be made concerning the country's goals and also the way in which
it sets out to reach these goals.
The Congressional Research Service in this study has outlined five
possible energy scenarios which exemplify different options and prior-
ities. Included are a reference case, a high electric use case, two high
oil cases (limited imports and high imports), and a conservation case.
Through the cases this paper attempts to assess the economic response
to various methods of meeting our energy demand through 1990.
Projected end use energy consumption in 1990 ranged between a
low of 96 quads in the conservation case to a high of 108 in the base
case. Annual average growth rates thus ranged from 1.9 to 2.7 percent.
Imported energy comprised 23 percent of total consumption in the
high electric case and ranged up to 35 percent in the high oil import
case. Prices for the primary sources of energy were, for the most part,
According to these scenarios the high electric case is expected to
generate the strongest domestic economy over the long run; reliance
on energy conservation through high energy prices shows the weakest
results. Reliance on imported oil would also result in a relatively
weak domestic economy. As a group, the alternative forecasts indi-
cate that as long as energy is available in the forms and quantities
assumed in the simulations, and there are no unforeseen shocks to the
system such as the 1973-74 OPEC price increases, the flexibility of the
economy, as interpreted by the model, would minimize the economic
differences flowing from the various energy source assumptions.
Unemployment levels indicated for all cases are substantially
lower than today's 6-7 percent level. Unemployment can be main-
tained at a relatively low level, according to the model, due to the
projected sharp decline in the labor force growth rate. This in itself
can be disputed and is somewhat deceptive, as indicated in the paper.
Most of the differences in the forecasts of economic growth occur
after 1980 when the variances in the rates of investment spending
are most pronounced. The average real growth rates of GNP to 1990
range only from 2.5 to 2.8 percent per year.
It must be noted that projections are based on an interpretation
of the present, and how we view the future from within this frame-
work. Thus the degree to which one can accept these results is based
on the extent to which one agrees with the CE-S assumptions and the
structure of the Wharton energy model used to test these assumptions.
ENERGY AND THE ECONOMY
(The Economic Impact of Alternative Energy Supply-Demand
Severe winter weather in 1976-77, and the consequent shortages
of natural gas, fuel oil and electricity in many areas of the United
States has raised the energy consciousness of the country. This
consciousness has been further heightened by the President's call
for the ''moral equivalent of war." One's perception of the need for
and the kind of war, however, is dependent to a considerable extent
on one's perception of the direction and velocity of future energy
demand, as well as one's value system.
These perceptions color the assumptions upon which all forecasts
are based. Assumptions are the product of insight and intuition heavily
influenced by a vision of the future based on a conception of the
present. In short, if times are hard, forecasts will tend to be gloomy;
if times are good, they will tend to be overly optimistic. The above
can be further summed up by noting that no one can forecast the
future with confidence; there is always a strong element of risk
and uncertainty. If we do sometimes turn out to be right, it is prob-
ahlj for the wrong reason (s). Despite the limited accuracy of long-
term economic forecasts, they are a useful exercise in that they can
provide a target or goal for policy formulation as well as an insight
into possible reactions to various alternative proposals and assump-
It is in this spirit that we have developed several energy scenarios,
and attempted to measure the impact of these on our economy.
Before looking at where we may be heading, however, it may be
useful to see where we have been.
U.S. Energy Demand, 1950-76
In 1973 the Arab nations imposed an oil embargo that did more
harm to our national ego than to our economy. At approximately
the same time OPEC raised oil prices to a level that is resulting in
a massive income transfer from the energy consuming countries
to the energy producing countries. The long-term impacts of this
tax-like situation are still not clear. The short-run consequence
of these actions, however, together with a coincident decline in
economic activity, was a drop in energy use from the record high
in 1973. Current data indicate that energy consumption may have
resumed the march upward, since consumption in 1976 was some
4.8 percent above 1975, although it is still 1 percent below 1973.
The 4.8 percent rate of growth is substantially above the post-
World War II (1950-76) growth rate of 3 percent per year, but is
in line with the 1965-70 rate of 4.7 percent annually.
Throughout the post-war period, consumption has grown at a
relatively smooth upward pace with a shift to a somewhat steeper
slope in the early 1960's (fig. 1). This increase was encouraged by
rising real income coupled with declining real price. From the graph,
however, it is apparent that real price and consumption of energy
are closely related.
In order to more clearly illustrate this relationship, we have used
5-year averages to smooth out the annual fluctuations that have
occurred in both energy use and price. For example, energy growth
in the 1973-75 period was negative, but the average for the 5-year
period, 1972-76, followed the past trend. During this same period,
prices rose to record highs implying that consumption has not re-
ponded in the latest 5-year period to the price signal.
Consumption and Price of Energy,
Five Year Averages, 1947-76
Sourca: Energy PerspectivM 2, MS. Dspaitmtnt of jntatior, Jun* 197S, p. 63 & 89.
The lack of response should not be taken as an indication that energy
use will fail to react to rising energ};^ costs, but rather as an indicator
that it takes time to turn things around. Constantly declining energy
prices over several decades has encouraged the creation of an inventory
of relatively energy inefficient houses, cars, and equipment that w;in
take years to replace or upgrade.
The initial impact of conservation measures, whether induced by
price rises, taxes or government fiat, will be minimal. These impacts,
however, will tend to increase at a geometric rate over time as items
of equipment are replaced with more energy efficient equipment.
Energy growth occurred in all economic sectors in the post- World
War II period, but not at equal rates. For example, as shown in figure
2, the household-commercial and transportation sectors rose at 3.2
and 3.3 percent annually between 1950-76, while the industrial sector
grew at 2.4 percent. As a consequence of these differential growth
rates the shares of total enercj^y consumed by each ecoQomir. sector
shifted during the period. The industrial sector, inchidin^ nonfuel
uses, accounted for 38 percent of energy use in 1950, but only 29 per-
cent in 1976. The household-commercial and transportation scttor
maintained their shares at approximately one-fourth each throughout
If one were to look at net energy, however (that is total energy
consumed less conversion losses), a somewhat different picture would
emerge. The industrial sector would still have decreased its share,
while the household-commercial and transportation sectors would
increase from one-fourth each to approximately one-third during the
26-year period. These changes reflected the increasing electrification
of the household-commercial sector and the increasing inefficiency of
the transportation sector.
Energy Consumption by Sector 1950-75
Non Fiitl L'ses
l^csst^fd" Fj^S Use.
; ^ous&h&kl B- Ccmmsi-ciai '
^ \ \
70 72 74 76
$oyirc9: Eiierav ^arspectfv^ Z USPl p. 6S. 67. 78, 206. £r H&vtis Retaase 3/14/77.
Annuai U.S. Ersarcy U** hn '597€.
In computing these figures, consumption of energy in the form of
electricity was counted at its output value. The losses incurred in the
conversion of primary energy sources to electricity were counted sep-
arately. Such losses increased at approximately 4.7 percent per year
between 1950 and 1976, so that by 1976, conversion losses accounted
for 19 percent of total energy compared with 13 percent in 1950. This
substantial increase reflected the steady electrification of the Nation,
as well as a stabilization in generating efficiency.
Between 1950 and 1975 the number of kWh of electricity produced
by a unit of heat increased at an average rate of 1.5 percent per year.
There was virtually no improvement in the 1965-75 period, however,
indicating an even higher rate of improvement in the 1950-65 era
The flattening of the generating productivity curve during the past
10 years has been the result of the imposition of strict environmental
requirements, introduction of a new technology in terms of higher
operating temperatures and pressures, and elongation of the planning
cycle. As these difficulties shake-out and as the technology for pro-
ducing electricity continues to improve, there should be renewed im-
provement in conversion efficiency.
In the 1975-76 period, electric utility conversion efficiency has
shown a substantial improvement, but we do not know if this will
continue, or if it is simply an aberration in the curve. Although one
year cannot indicate a trend, it is likely that the rate of conversion
efficiency has resumed its upward march, albeit at a slower pace than
Electric Generating Productivity
X I— -.«
1 40 P
.^f*" Net Generation
Scurss: Energy P^rsixactivM 2. USOI. p. 73 & 1^.
The importance of improved conversion efficiency to overall energy
use can best be appreciated by considering the primary energy needs of
the electric utilities under alternative rates of conversion improvement.
If electric consumption were to grow at an average rate of 5 percent
per year for the next 15 years, close to 4 trillion kilowatt hours would be
required in 1990 compared with the present 2 trillion. This expansion
in the demand for electric energy could be satisfied by a heat input of
approximately 40 quadrillion Btu (Q) if the heat needed to i)rodiice a
kWh (boat rate) declined 0.1 percent per year. Some 3 Q, or 1.5 million
barrels of oil equivalent per day could be saved, however, if the heat
rate improved at approximately half the historic rate, or 0.7 percent
annually. There is a theoretical limit to the efficiency of this conversion
process, and we may well be pushing hard against it. As a consequence,
improvements such as indicated above may be hard to come by.
As the consumption of clectricit}^ rises, energy in])ut re(iiiirenients
will also rise, but at a faster pace if generating efliciency does not
improve because a larger quantity of the input will be wasted.
If efficienc}^ can be improved, this waste from conversion losses can
be reduced. Losses, however, may well increase in the future even with
improved generating efficiency, due to our continuing need to turn to
lower-grade sources of energy and because of increasing environmental
restrictions. For example, the more we are foi'ced to ])roduce oil
through secondary or tertiar}^ recovery methods, the greater the
investment of energ}^ in order to produce energy. A further shift from
eastern coals to western coals will have a continuing serious impact
on losses, since it takes approximately the same quantity of energy to
produce a ton of western coal, but those coals have a lower heat content
and thus ^deld less energy than most eastern coal. Using eastern coals
with scrubbers will also impose an energy penalt}^
Greater processing requirements in the future are also possible. For
example, more extensive cleaning of coal to remove pyritic sulfur will
consume more energy. The production of fluids from coal carries v/ith
it greater conversion losses than at present. Output of low-lead gaso-
lines means the use of more crude oil to yield the same usable energy.
Thus, the outlook for the future is for a greater disparity between
gross energ}^ consumption and final demand despite improvements in
electric utility generation. The conversion losses will be transferred
from the electrical generating sector to the primary energy producing
sectors, since the bulk of the losses will tend to occur back at the mine
or wellhead rather than at the generating station. In short, barring
some kind of technical breakthrough we vv^ill have to run faster and
faster to stay in the same place.
This situation is further compounded by the growth of appliance
o\\Tiership over the past 13 to 14 years in the household-commercial
sector, as well as by an increase in electric heating and air-conditioning.
The proportion of households owning various appliances grew
dramatically in the 1960-74 period, with the exception of washing
machines (fig. 4). The latter declined during this period primarily as a
result of the trend toward single-individual households and young
couples living in apartments. These types of households generally use
common or commercial clothes-washing facilities. In addition to the
increased use of appliances is the fact that 49 percent of the houses
built in 1974 were electrical^ heated and 48 percent were air-con-
ditioned. This preponderance of electric space conditioning will result
in greater future energ}^ use since the higher efficiency at the point of
use is often more than ofi'set by conversion and transmission losses
compared with other heating sources. This situation may be mitigated
substantially by the widespread use of heat pumps rather than re-
sistance heating. It should be noted, however, that the use of elec-
tricity in the household-commercial sector has increased close to six-
fold between 1950 and 1975, and all indications point toward continued
increases in electric usage in that sector of the economy.
Household Ownership - Cars & Appliances
Percent of U.S. Households
SOURCES; StttJsticaJ Abstract of U.S. 1975. p 406 & 1976. p. 434.
Figure 4 also illustrates that there has been a substantial growth in
the proportion of households owi^iing one or more vehicles between
1960 and 1974, as well as a virtual doubling in the percentage of house-
holds owning two or more cars. Not only do we have more automobiles,
but the bulk of the automobiles currently being produced are equipped
with energy-consuming options. In 1975, approximately 92 percent
of the automobiles produced were equi])ped with automatic transmis-
sions, 90 percent with power steeling, 76 percent with power brakes,
73 percent with air-conditioning and 71 percent with V-8 engines.
These numbers represent substantial increases over 1960. For example,
in that year only 7 percent of the cars produced were air-conditioned.
Adding to the energy im})act of these options was the installation
of pollution-abatement equipment. These two trends resulted in a
decline in the overall vehicle efficiency from 12.4 miles per gallon in
1960 to 11.9 in 1973 (fig. 5). During this same period, passenger car
efficiency dropped 8 percent from 14.5 miles j)er gallon to 13.3. At the
same time that efficiency was declining, miles chiven doubled from
719 billion vehicle miles m 1960 to 1.4 trillion in 1975.
Productivity of Transportation Energy
Avg. Miles Per Caifon
Vehicle Miles Traveied
J_i I I ?
70 72 74 76
Since 1973 both vehicle and automobile efficiency have improved.
This trend should continue as the Natioi\ moves toward the use of
lighter and smaller cars in the future, although better mileage \\dll con-
tinue to be offset to some extent by more miles driven. An indication
of the importance of improved vehicle efficiency is available from the
following computations. If the 135 million vehicles on the road today
had an average efficiency of 20 miles per gallon instead of 12, gasoline
consumption would be over 4 million barrels per day less. If the effi-
ciency was 16 miles per gallon, the savings would be close to 3 million
barrels per day. It is likely that vehicle efficiency will continue to im-
prove for at least the next several years as a result of the legal require-
ment for more effxcient cars, coupled with the push for mass transit and
other energy saving transportation options.
The result of the various trends discussed earlier was a rather sub-
stantial increase in energy productivity in the 1960-67 period, follow^ed
by a decline to 1970 and a rise to new highs since that year (fig. 6).
Productivity is the output derived from a unit of energy input. The
productivity of gross energy has been improving at a slower rate com-
pared with net energy since 1972, reflecting the increased importance
of conversion losses from electric utility plants in the overall energy
picture. The household-commercial sector, on the other hand, sub-
stantially increased its productivity since 1970, reflecting improved
efficiency of appliances, the use of insulation, and other measures to
cut energy usage in response to higher energy prices. Improved energy
efficiency in this sector results in a double bang for the buck due to its
orientation toward electricity. A reduction in the need for electricity
also reduces conversion losses.
Energy Productivity indices
In summing up, it may be of importanceTthat gross energ}^ produc-
tivity improved during a time when energy prices were declining.
This would seem to indicate that improved energy efficiency may be
impacted more by factors other than price, such as the introduction
of new technology and processes which tend to be energy efficient
more by accident than by design. From the foregoing discussion it
would appear that more bang for the Btu could be^obtained by im-
proving the efficiency of the vehicular fleet and the electric utility
industry than by any other measure.
The Energy Scenarios
Having briefl}' recounted where we have been, we can look at where
w^e may be going. In order to do so, five possible energ}^ scenarios
have been developed. These include a reference case, a high electric
use case, two high oil cases, and a conservation case.
In order to test the imi)act of these scenarios on the energ}^ sector
and the U.S. econom}^, the Wharton Econometric Forecasting Associ-
ates, Inc. (WEFA) Annual Energy Model was used. This particular
version of the WEFA model while based on their annual long-tei'm
forecasting model, is still in the development stage. The principal
difference between the standard long-term model and the energ3^
version is the addition of a detailed energy sector. To achieve this,
the mining sector of the annual model, which includes most energy
production, has been expanded to s])ecifically forecast crude petroleum,
natural gas and coal jjroduction. In addition, the output of electric
and gas utilities, as well as oil refineries, has been segregated and a
forecast prepared. This greater level of disaggregation is then cai'ried
through the economy allowing estimates of energ3' consumj)tion to
be developed. The current form of the model does not permit estima-
tion of energy use by intermediate users such as electric utilities,
althougli the model estimates gross demand for energy and some final
Most of the prices for primary soinxes of energy, such as natural
gas, coal, and crude petroleum, are determined outside of the model.
Prices of secondary forms, such as electricity, gas, and oil refinery
products are determined within the model but, as was necessary for
the high electric alternative, can be modified to achieve specific
results. In our case the different energy simulations wei-e accornjjlished
by making changes in the various energy prices from their baseline
levels. In addition, it was necessary to change taxes on certain energy
inputs which in effect alter the prices for some of the alternative energ\'
The ])rice changes needed to meet our assumptions were computed
b}' WEFA. These, as a consequence of the implicit assumi)tions in the
model, do not ])roduce a constant relationship between ])rice changes
and consumption, nor is there a one for one change. For example, in
the case of peti oleum a 5.6 percent annual average incre tse in price
between 1976 and 1990 results in a 2.6 percent per year annual in-
crease in consumption in the base case; a 9.2 percent annual rise in
price in the high electric case suppresses consumption to a 2.0 percent
annual increase. In uie latter case this implies that a 10 percent
increase in price will allow a 2.2 percent rise in consum.ption, vhile in
the base case a 10 percent price rise permits a 4.6 ])ercent i i^e in con-
Compared with the base case the relationship in 1990 would be as
Percent increase from the
High oil — Domestic _
High oil— Imports
These and other changes work through the model by affecting the
supply and demand for the several energy products, and by affecting
the relative prices among the various substitute energy commodities.
Additional adjustments to the model have been made as necessar^^ to
be sure the results are consistent with available a priori knowledge.
Where taxes are required to achieve a particular goal, the receipts are
recycled through the economy to avoid sharp economic changes. Mon-
etary policy assumptions have also been adjusted where needed to
avoid unreasonable tightness or ease in the financial markets, as
well as to influence the cost of capital and investment decisions.
The various assumptions made in each case together with the
computed energy estimates (table 1) follow:
TABLE 1— ENERGY CONSUMPTION, 1976 AND 19S0, BY CASE
Total consumption (Q)
Average growth rate 1976-90 (percent)
Percent of total consumption:
1976 = 100
Electricity consumption (billion kilo-
watt-hours) 2,040 4,050 3,653 6,011 3,664 3,676
Electricity growth rate (1976-90)
(percent) 5.0 4.1 7.5 4.2 4.3
Coal (per ton) $20.00
Electricity (per kilowatt-hour) 2. 9)4
Natural gas (per thousand cubic
feet) $ 0.90
Petroleum, crude (per barrel)... $13.50
' Uncorrected for improved efficiency required to permit elecric prices to decline. When corrected total energy con-
sumption would be 107Q.
Base Case. — This case is essentially a high energy growth case
except that electricity consumption was constrained to a 5 percent
annual growth rate. It was further assumed that there were no supply
constraints and that energy prices would rise at a relativel}^ moderate
pace over the 14-year period. Coal prices would be up 65 percent,
electricity 88 percent, natural gas 145 percent, and petroleum 114
percent compared with 1976.
As a consequence of these price assumptions, total energy consump-
tion is projected at 108 quads by 1990, indicating an annual growth
rate of 2.7 percent.^ The base case gro^vth rate compares favorabl}''
with the 3 percent growth experienced during the post World War II
period. The lower rate results from conservation induced b}' price, as
well as anticipated slower economic growth. The latter should occur
because of demographic changes, the increased importance of services
and environmental constraints.
The energy mix in 1990 is expected to be somewhat different than
in 1976, although oil will continue to provide close to half our energ}^
needs. Approximate!}^ two-thirds of our petroleum needs will be
imported, resulting in 31 percent of our total energy consumption
comprising imports, compared with 20 percent in 1976. The imports
include crude petroleum, residual fuel oil, various other products, and
a snaall quantib,^ of liqu'fie.l natural gas (LMG). The major shifts in
energy mix, however, are expected to include a decline in the impor-
tance of natural gas, and increased use of coal and nuclear sources.
Nonconventional sources, such as solar energy, are not expected to
substantially contribute to our overall energy needs in the relatively
short time frame of 14 years.
1 Those results are compjirable to those of a 1976 CHS study that used the Data Resources
Inc. (DRI) energy model. See Kaufman, Farb, Daly. Ch. II. U.S. Energy Demand Forecast,
1970-90 in Project Interdependence : U.S. and World Energy Outlook through 1990.
Committee Print 95-33. November 1977.
Conservation Case. — The conservation case assumes that the inipaf ts
of existing legislation such as the Energ^^ Pohcy and Conservation
Act are carried through 1980 and that domestic petroleum j)rices
follow the dictates of that legislation. Natural gas prices are main-
tained at a $1.45 per thousand cubic feet (mcf) through 1980, and
then are permitted to rise at an annual .'k7 percent rate. ( oal pieces
are assumed to move in correlation with oil prices to H)80 and then
remain virtually constant. Nuclear luei prices are assumed to in-
crease at an annual rate of 13 percent; crude oil prices arc postulated
to rise, in real terms, at between 0.5 to 1 percent a year.
As a consequence of these assumptions, total energy use is estimated
at 96 quads which indicates an annual growth rate of approximately
1.9 percent between 1976 and 1990. The energy mix in this case is
somewhat different than that estimated for the base case. Petroleum
contributes a somewhat higher proportion of the total than in the
base case, but energy imports are a lower proportion. It is assumed
that the higher oil prices w^ill stimulate domestic output and depress
demand resulting in a lower import requirement, although these
sources will still supply over half of our petroleum.
Coal contributes approximate!}^ the same percentage of our needs
as in 1976, but less than in the base case ; natural gas declines reflecting
the substantially higher prices and suppl}^ constraints, while the
proportion of energy derived from nuclear sources increases dramati-
calh^ compared with 1976. Consumption of electricity^ grows at
barel}^ more than 4 percent annuall3^
High Electric Case. — The high electric case assumes that electricit}^
consumption will follow the long-term trend and double ever}^ 10
years. The bulk of the incremental electric output will be generated
by nuclear and coal units in this case. To achieve this result, crude oil
prices were increased at an 8 percent annual rate while the real price
of eiectricit}^ was assumed to fall by approximately 1 percent p»er 3^ear.
In addition oil and gas inputs to electric utilities were taxed in order
to make these noncompetitive with other fuels.
In the high electric case, prices were adjusted to insure conversion
to electric generation without regard to other potential factors affect-
ing energy prices, such as the impact of the huge increase in nuclear
generation on uranium prices. Also, for the high electric case, the
Federal Reserve's discount rate was increased by one-half of 1 percent
(50 basis points) in order to increase the cost of capital. The higher
capital costs have the effect of making nuclear energy more expensive,
preventing the system from over-stimulating nuclear generating
capacity and maintaining more reasonable spreads between long- and
short-term interest rates. The model structure, however, internally
allocates the necessary investm^ent spending for new electric generat-
The result of these manipulations is an estimated energy consump-
tion in 1990 of 113 quads indicating an annual average growth rate in
excess of .'] percent. This is achieved by a rather dramatic increase in
the contribution of nuclear energy compared with the base case. The
proportion of energy derived from coal is the same as in that case, but
oil consumption is only slightly higher than in the conservation case.
As a consequence, oil contributes 41 percent of our energy needs in
this case, and energy imports are only 23 percent. Oil imports, in this
case, are only 600,000 barrels more per day, or 0.4 percent, than in the
In considering this case, however, it sliould be noied that the price
assumptions imply an improvement in electrical technology that will
permit the price of electricity to decline over the period. This implicit
assumption, however, is not reflected in the energy inputs to the
electric utility industr}^ so that gross energy in the high electric case
would be less than indicated above.
The price assumptions implicitly assume improvement in the heat
rate at one-half the historic rate, or 0.7 percent per year. At that rate
the primar}" consumption of energy would decline by 6 Q, so that total
energy use in the high electric case would be 107 Q, or approximately
equal to the base case. It would thus appear that the high electric
case could result in reduced energy imj^orts, and a total energy con-
sumption no greater than that case. In relation to the conservation
ca'^e, energy imports would be less. If the 6 Q saving were prorated
among all sources, imports in tlie high electric case would be 5 percent
less than the conservation case. On the other hand if the full savings
could be attained at the expense of imports, these would be 23 percent
below the conservation case.
High Oil Cases. — The high oil cases were broken into two parts. In
the one instance it was assumed that imports were limited, and that a
substantial portion of our oil requirements would be achieved through
domestic production such as increased oft'-shore output, or through
the production of shale oil or liquefaction of coal. In the second in-
stance, it was assumed that the bulk of our oil needs would be obtained
The WEFA model, however, does not have a jnechanism to miike
such a distinction. To overcome this difficulty the price assumptions
in each instance were the same, but in the high oil-domestir case the
model was adjusted so that the mcremental increase in energy sup-
plies is produced domestically and reflected in the output of the
mining sector. In the high oil-imports case the increment is assigned
The assumptions made in each case included removal of all gasoline
taxes, imposition of an environmental tax on coal consumption by
electric utilities increasing at 10 i^ercent a 3'ear, aid ai\ increase in
domestic crude oil prices to reach $12 by 1980. Dom-estic crude prices
weie then held constant from 1980 to 1990.
As a consequence of these assum.ptiOi\s, consumption is estimated at
97 Q, or roughty equal to that forecast for the conservation case. This
occurs because of the relatively high energy' ])rices coupled wdth a
shift from electric heating to oil heat. The latter results in savings in
conversion losses at the gen.erating ])lant, thus contributing to a re-
duced enei-gy requirement. This is reflected in an electric consum])tion
growth rate approximately equal to the conservation case.
The comi)0^iticni of energy use in each case is ideu.tical, the only
(lifl'ei-ence being the level of imj)orts. In either case, the level of im-
jjoi'ted energy is rather high, accoup.thig for :^0 to o5 percent of our
Close to half of our energy would be derived from oil, with coal
(h'0])j)ing fiom approximately one-fourth in the referen.ce case to on.e-
fifth i)i. the high oil cases. Greaiei' reliance would be placed on u.uclear
on.erg}'- in these cases than, in the base case.
S()//i( Caveats. — The Ave cases as outlined are (le])er.dent on. our
ability to expand coal and nuclear output sufhciently to achieve the
stipulated goals (table 2). If this co.n be acliioved, oil output would only
have to increase between 22 and 32 percent ((lependin.<r on the ca^e) by
1990 compared with 1976. Natural gas supply, including imported LXG
is postulated to decline u]) to 20 percent, and thus cannot be counted
on to pick up any shortlall.
TABLE 2.-ENERGY SUPPLY, 1976-90, BY CASE
1975 Base vation
Coal (million ton-;) 597
Natural gas (trillion tons cubic feet) 19.8
Domestic 18. 9
Nuclear (billion kilowatt hours) 190
Petroleum (million barrels, per day) 17.4
Imports 7. 1
Other (quads) 3.5
In none of the cases have we made any assumption in regard to solar,
wind or other nonconventional energA^ sources. We feel the ability of
such sources to contribute to our energy needs is severely limited over
the timeframe with which we are concerned. In no case, however,
would we envision that these new technologies could contribute more
than 3 to 4 Q in total by 1990 because of the la^s in the system. We
would regard that forecast as extremely optimistic.
Our case estimates call for an increase in coal production ranging
between 34 to 87 percent over the 1976 level. Such increases appear to
us to be difficult at best unless the institutional and economic problems
inhibiting expansion of these industries can be solved.
On the nuclear side the economic issues revolve around the rising
capital cost of such units and their availability. The major problem,
however, may be the long lead time required to build such plants, plus
strong opposition by some elements of the public. It can take from 10
to 1*^ years to build a nuclear plant because of regulatory delaA^s,
environmental reauiremcnts, and law suits. In addition, low electrical
load growth in 1975-76 caused the cancellation of plants. As a result,
orders for new nuclear plants have declined.^
The impact of the decline in new plant orders on our ability to meet
the nuclear capacity requirements postulated for 1990 is still uncertain.
As of June 30, 1977, there were 67 nuclear units licensed to operate, 89
being built, 54 planned with reactors ordered, and 22 others planned
without reactors ordered. These 232 plants have a total capacit}' of
231 million kW. If all of these are in service by 1G90 and operate at a 60
percent capacity factor, nuclear output would total 1,213 billion kWh
in that year, or more than enough to meet the estimated requirement in
all of our cases except the high electric case. Even if the 22 reactors
planned but not ordered die on the drawing board, nuclear output
(1,073 billion kWh) would still be enough in 19C0 to satisfy most of our
1 Wall street Journal, "Firms That Make Nuclear Power Plants Expect Slump In New
Orders To Continue," Nov. 30, 1977, p. 24.
There is, however, a high probabihty that some of the units under
construction may not come on hne on the targeted date or that some
of those planned and ordered may yet be cancelled or delayed. In that
case, we could be hard pressed to meet our nuclear goal.
Coal then becomes the fuel of last resort, but this industry is faced
with serious problems of its o\\ti. On the supply side these include
questions concerning the availability of trained mine labor, the profit-
ability of the industr}^ and thus its ability to raise the needed capital,
and environmental regulations. The latter impact the industry both
at the mining and consumption ends of the business. On the mining
side, surface mine and subsidence regulations may inhibit the develop-
ment of additional capacity, or may introduce sufficient uncertainty to
cause investors to wait for a clear signpost of what can be expected.
On the consumption side, many localities have literally regulated
coal out of the market for environmental reasons. Whether these areas
are now AA'illing to permit this fuel back in is problematic. Further, the
full effect of recent "clean air" legislation has not yet been felt, nor
has the problem of sludge disposal from stack gas scrubbers been
As a consequence of the above, there is a strong probability that
neither coal nor nuclear will be able to fulfill its assigned role. In that
case, oil imports would burgeon even beyond the substantial quantities
postulated in the high oil-imports case.
The question of economic impacts resulting from variations in the
energy sector is a difficult one. To some extent this interaction has
been probed by the Energy Modeling Forum. A common set of as-
sumptions and scenarios were tested on various models. The general
conclusions of this study were as follows :
In the presence of constant energy prices, increases in economic activity produce
similar increases in energy demands, although these may be moderated by trends
toward less energy intensive products and services.
Higher energy prices or reduced energy utilization need not produce propor-
tional reductions in aggregate economic output. There is a potential for substi-
tuting capital and labor for energy and the contribution of energy to the economy,
relative to these factors, is small.
The models do show some substantial reductions in economic output resulting
from higher energy prices. The magnitudes of these reductions are very sensitive
to the substitution assumptions implicit in the models. Further, the impacts may
be large for individual sectors of the economy.
The benefits of energy substitution may be lost in part if energy scarcity im-
pedes capital formation. Reduced energy inputs may cause lower levels of invest-
ment and, consequently, reduce potential GNP. This indirect impact may be the
most important effect of energy scarcity.^
A summary of the output of the various models and their problems
is contained in appendix I.
In our case, however, we were not probing the economic reaction to
variations in energy output so much as the economic response to
different methods of meeting the demand. Thus, our five scenarios
were all run through a single model. In reviewing the results one must
keep in mind the fact that the answers are conditioned by the energy-
economy relationship built into the model. The numbers derived from
" Enern,'v Modeling Forum, "Enerjjy and the Economy," Institute for Energy Studies,
Stanford tJniversity, EMF report 1, September 1977, p. iii.
the computer should, tlierefore, be regarded in relative terms rather
than as absolutes.
Of the five alternative enero,y simulations considered here, the lii^h
electric case is expected to trenerate the stron<i,est domestic economy
over the long run; the conservation case is expected to result in the
weakest economy. Over the 1976 to 1990 period, the averajj^e annual
rates of growth of real GNP ranged from 2.9 to ;-5.2 percent per year,
although the components showed greater variations (table li). Reli-
ance on imported oil, together with relatively strong increases in
energy demand, would also result in a relatively weak domestic
economy. As a group, the alternative forecasts indicate that as long
as energy is available in the forms and quantities assumed in the simu-
lations, and there are no unforeseen shocks to the system such as the
1973-74 OPEC price increases, the flexibility of the economy is likely
to minimize the economic differences flowing from the various energy
TABLE 3— SUMMARY ECONOMIC IMPACTS, 1976-90
1976 Base vation electric Domestic Imports
Real GNP 1 1,364 1,943 1,900 1,962 1,903 1,901
Growth rate 1 (percent) -.. 3.1 2.9 3.2 3.0 2.9
GNP: Energy index2 100 98 108 99 107 107
Real personal consumptions... 819 1,229 1,200 1,236 1,200 1,195
Manufacturing output 3 305 519 505 533 504 503
Real gross piivate domestic investment 3 183 305 286 326 287 288
Netsxpoits^- -9 -30 +14 -20 -8 -35
Federal deficit or surplus <.. -59 23 14 74 -5 -19
Unemployment (percent) 7.7 3.3 4.6 3.3 4.5 4.7
Inflation rate (percent)' 5.1 5.0 5.3 5.4 5.0 4.9
Savings rate (percent) 6.6 5.1 4.9 4.2 5.2 5.0
Bond rate (percent).. 9.0 8.5 8.5 9.7 8.3 9.2
Commercial paper rate (percent) 5.3 6.5 6.6 7.5 6.4 6.3
1 Average annual. 3 Billion 1972 dollars.
2 1976 equals 100. * Billion current dollars.
In this regard, CRS had earlier completed an anah^sis of impacts
on economic inputs resulting from energy conservation under various
assumptions pertaining to the flexibility of the econom}^^
If the economy has sufficient flexibility to adjust to changes in
energy use, an 18 percent drop in energ}^ inputs from what would
normally be expected would result in a 1.2 percent rise in capital and
a 1.3 percent increase in labor inputs coupled to a decrease of 0.3
percent in other materials. As a consequence of these shifts GNP
would only be 0.7 percent below the base. The econom}^ would pay
a price, however, in terms of greater inflationary tendencies because
total productivity would be some 3 percent below the base, indicating
If the economy were relatively inflexible, however, total productivity
would only be below the base by 1 percent, indicating relatively mild
inflationary tendencies. GNP, in this case, would be 9 percent below
the base, with capital and labor inputs 8.5 and 8.8 percent less,
3 Kaufman, Alvin and Barbara Daly, "Alternative Energy Conservation Strategies : An
Appraisal" CRS, 77-114S, 45p ; and a revised report entitled "Alternative Energy Con-
servation Strategies, An Economic Appraisal."
The trade-off thus appears to be between economic efficiency and
reduced economic growth. It should be noted that in the worst case,
unemplo^TQent would be catastrophic in approaching 14 percent of
the labor force if wage rates remained constant.
Employment and Unemployment. — Even though GNP growth is low
relative to historical rates, unemployment varies from a low of 3.3
percent of the labor force in the base case to 4.7 percent in the high
oil imports ca'^e. By today's standards these rates may seem to be
unachievable given the projected economic growth. There are, how-
ever, two reasons for the relative!}^ low rate. One is the projected sharp
decline by Wharton in the rate of growth of the labor force to less
than 1 percent annually by 1990 compared with well over 2 percent
currently. Just as the current economic situation is made more difficult
by the rapid increase in labor supph^ and has prompted many analysts
to redefine ''full employment" at or above 5 percent unemployment,
beginning in the 1980's the decline in the rate of new workers entering
the job market may permit lower overall economic grovrth while still
achieving ''full emploA^ment." This slower growth in the labor force
will tend to lower the "full employment" rate of unemployment.
While the rates of growth of the labor force used in this analysis tend
to be lower than some, the direction of the change is clear, as is the
magnitude of its potential impact on the required economic growth
to achieve and maintain full employment. The slower rate of growth
of the potential labor force will be offset by continued increases in
labor force participation b}' women. This has been accounted for in
A second reason for the low unemployment rates derives from the
definition of labor force and unemplo3^ment. The labor force comprises
all of those persons who are employed and unemployed. The latter
are defined as those not working but seeking employment and avail-
able. As people become discouraged or unavailable, they drop out of
the labor force and are no longer counted as part of the unemplo3^ment
If we review table 4 we see that U.S. working age population (over
15 years old) remained constant in all five energy cases, but labor force
varied by as much as 1 million people. If these persons are added
back into the ranks of the unemployed, the rate would be approxi-
mately 1 percentage point higher or 5.7 percent in the high import
case. Employment will var}- between a low of 110 million persons in
that case to a high of 112.7 million in the high electric case. The latter
can produce 2.4 million more jobs than the conservation case, but
approximately the same emplo3^ment level as the base case.
TABLE 4.-EIVIPL0YMENT AND UNEMPLOYMENT IN THE UNITED STATES, 1977-90, BY ENERGY SCENARIO
(Millions of people)
1977 1980 13S5 1990
Population ever 15 yr old.
Civilian labor force:
High oil - Domestic
High oil— Imports...
High cil- Domestic.
High oil— Imports...
Inflation. — It, therefore, is possible that in tlie 1980's, when the
rate of labor force increase is once again down to close to 1 percent per
year, not only will lower rates of economic growth be suitable, but
inflationary pressures associated with tight labor markets (under
percent unemployment) may subside as well.
The present estimates of inflation through 1990 are largely a result
of upward price pressures already built mto the economic system,
and additional pressures brought about by increasing energy costs.
The energy prices (table 1) were developed to generate the particular
energy mix desired and do not necessaril}^ reflect potential develop-
ment costs. It is quite likely that the development of synthetic fuels
(?;, n fuels) will require considerably higher prices than implied here
because of higher development costs. For the purposes of our analysis,
it is assumed that the current rate of investment in research and de-
velopment in the syn fuel case will generate the necessary production
at the assumed prices.
If energ}^ prices increase more rapidly than assumed, the rate of
inflation would undoubtedly be higher. Even more importantly, the
rate of economic growth could be slower, and there would be greater
unemplo^^ment than would otherwise be the case, unless all of the
spending on energy is recycled back into the economy. As energy
prices increase, the resulting economy w^ould move toward that
described by the conservation alternative.
xls expected, the economy would suffer with the highest inflation
rate in the high electric case, and the lowest in the high oil imports
case. The conservation case is a close second to the high electric case.
The latter results in more inflationary pressure because of the higher
levels of economic activity and higher oil and natural gas prices
required to produce the desired level and type of electric generation,
despite a postulated decline in the price of electricity. The inflation
forecast is also affected by the higher interest rates that are brought
about, at least partly, by increased investment spending in the electric
case. It is possible, however, that this could be offset by selected
monetary and fiscal policies. If methods can be found to achieve
conservation without having higher effective prices for energy, the
inflation rate would be correspondingly lower.
Investment. — If the policies indicated above are successful in reducing
interest rates, it is likely that investment spending would be somewhat
higher and the overall level of economic activity greater than esti-
mated. The projected higher inflation rate, together with the relatively
low level of unemployment, also causes federal tax receipts to swell,
resulting in a projected Federal budget surplus in excess of $70 billion
in 1990 in the high electric case. As a result of this surplus, the model
generates a relatively low rate of private saving so that the Govern-
ment, in effect, is providing most of the savings in the economy. This
also occurs, but to a lower degree, in the conservation and base cases.
If Congress acts to maintain stable average tax rates, limiting the
accumulation of a budget surplus, there v/ould be some additional
economic stimulus; but this stimulus would be largely offset by an
increase in the individual savings rate which would reduce private
It is clear from the model that the most important econoinic stimulus
comes from the increased levels of investment in the high electric
case (table 5). Even though the electric utility sector in that instance
requires more funds than in any of the other alternatives, the economy
in general responds with increased investment in all areas; this require-
ment would be largely financed through higher corporate profits until
1985, and after that date by Government saving.
TABLE 5.— ESTIMATED FIXED INVESTMENT BY SECTOR, 1976-90
[Billions of 1972 dollars]
Fixed investment. 177
Commercial and other
Transportation and communication
Gas and water
Farming and mining
The lowest investment occurs in the conservation case, with the
major drop in the utilities sector. The two high oil cases tend to be in
the middle, again as a result of lower utility investment compared
with the base case. In this regard, we would note that investment in
the high oil domestic case would be close to that in the electric case
with the mining sector absorbing substantial sums for syn fuel de-
velopment. As a result of the way in which the case was computed,
this impact does not occur.
The investment distribution through the various sectors tends to be
mrearkably similar in each case except for the utility sector.
Personal Consumption. — Personal consumption expenditures would
be highest in the high electric case (table 6) and lowest in the high
oil-imports case. Regardless of the case selected, however, services
are the major expenditures sector, followed by nondurable goods. The
importance of the services sector results, to some extent, from heavy
expenditures for electric utiUty services. From the point of view of the
homeowner most of the benefits of increased personal consumption
expenditures are likeh' to be eaten up by higher household operating
expenses. In 1990, high electric assumptions would result in approxi-
mately 4.5 percent of the total personal consumption expenditures
being spent on heating, gas and electricity, compared with 3.3 percent
in 1977; these expenditures would account for 4 percent in the base
case. In the conservation and high import cases the heat — gas — electric
percentage would only increase to about 3.5 percent. The higher level
of overall economic activity projected undei- the high electric assump-
tions should generate sufficient personal income so other categories of
consumption are not lowered by the higher heating and utility expendi-
tures. This level of consumption spending, however, could not be
maintained if the personal saving rate was not unubually low as an.
offset to the large Federal budget surplus.
TABLE 6— ESTIMATED PERSONAL CONSUMPTION EXPENDITURES, 1975 90
[Billions of 1972 dollarsi
1976 Base vation electric Domestic Imports
Personal consumption expenditures 819 1,229.0 1,200.0 1,236.0 1,200.0 1,195.0
Durable goods 118 204.0 199.0 204.0 199.0 198.0
Nondurable goods 334 480.0 472.0 478.0 471.0 469.0
Services 357 545.0 529.0 554.0 529.0 528.0
Heating oil and coal 5.5 5.4 4.8 5.6 5.5
Electric utility services 38.0 32.0 45.0 33.0 33.0
Gas utility services 5.2 4.8 4.7 4.8 4.7
Foreign Trade. — In all of the cases considered in this paper, with
the exception of the conservation case, the balance of trade as meas-
ured by net exports is in favor of other countries measured on a current
dollar basis (table 7). Onl}^ the conservation case has a positive balance,
and this despite the fact that the high electric case has a lower energy
import requirement. The conservation case results in the highest
level of total exports and lowest total imports of any of our five cases.
TABLE 7.-EXP0PTS AND IMPORTS, 1990
[Billions of dollars]
Case Exports Imports Net exports
High oil— domestic...
High oil— imports.. -..
This occurs because total imports, and to a lesser degree exports,
are more closely alined with overall economic activity than with the
volume of oil imported. Further, the electric case involves greater
imports of finished manufactured .eoods which could result in enhance-
ment of the U.S. standard of living as a result of increased foreign
Even though the high electric case is expected to generate the fastest
increase in the total value of imports of the five alternatives, any
negative implications are lessened by the fact that this increase is
generated by a stronger domestic economy than in the other cases and
not because of increased oil pa}Tnents. In this simulation, exports
increase at a somewhat slower rate leading to the development of a
trade deficit from 198S onward. In the long run, however, the inter-
national payments system would adjust, reducing the rate of increase
in manufactured imports and increasing exports. The net result would
be for a stronger U.S. economy in the long run.
The major trade deficit occurs in the high oil imports case. In this
instance, as a result of the large amounts of U.S. dollars going abroad
to pay for oil imports, foreign consumers are able to make increasing
claims on U.S. production. While this automatic adjustment process
can keep the U.S. economy running at reasonably full employment,
the long term benefits accrue to the oil exporters. These benefits are
all the larger because the terms of trade (relative to prices of traded
goods) have moved to the disadvantage of oil importers.
The above estimates are, of course, dependent on the assumptions
fed into the model as noted earlier. In the case of the external sector,
however, this may be even more so in the sense that additional vari-
ables are involved. For example, if the pattern of prices assumed are
different then the answer will be different. This is particularly critical
siDce imported energy prices are not set by the market, but by a cartel
operating under political as well as economic guidelines.
Other Energy Models
In the preceding pages, CRS — using the Wharton Annual Energy
model — has attempted to assess the impact of alternative energy
futures on our economy. We thought that it would be a useful addi-
tion to the CRS paper to describe the way several of the other models
work and what they are equipped to do regarding energy. The short
summar}^ of various models which follows is based almost solely on
''Modeling Energy-Economy Interactions: Five Approaches." ^ This
book contains papers presented in May 1977, at a Joint National
Meeting of the Institute of Management Sciences and the Operations
Research Society of America. The modelers whose works are presented
here were encouraged to the extent possible to follow a set of common
assumptions regarding resource availabilities, the substitutability
of other factors of production and goods and services for energy, and
possible constraints on the use of coal and nuclear power. For the
most part other assumptions are based on the CONAES (Committee
on Nuclear Alternative Energ}^ Systems) Modeling Resource Group's
base case GNP assumptions.
Four scenario runs were made through each model as described
(1) Ue: Unconstrained development of resources and 0.75 elasticity
of substitution ;
(2) Ce : Constrained development of resources and 0.75 elasticity of
(3) Ui: Unconstrained development of resources and 0.25 elasticity
of substitution ; and
(4) Ci: Constrained development of resources and 0.25 elasticity of
In the unconstrained cases, domestic oil and natural gas are ex-
hausted but large quantities of electricity are produced by coal and
nuclear power plants. In the constrained cases, the use of coal and
nuclear power is subject to substantial constraints.
The models dealt with here are all long range models ''exploring
rather gradual changes over decades." This long range feature can be
seen as a plus or minus depending on one's point of view. Admittedly
the long range (to 2000 and beyond) future is almost impossible to
foresee (especially as one considers the difficulty of forecasting even
the short-range future today), but the models are useful in showing
the long-range consequences of possible actions we might take in
the near future based on the best available information.
The choices taken regarding energy poKcy should at least be geared
in a certain direction; the models, by testing the various scenarios,
help to indicate the path the policymakers should take, based on a
future as seen from the perspective of today.
1 Hitch, Charles J., ed., "Modeling Energy-Economy Interactions: Five Approaches,"
Resources for the Future, Washington, D.C., 1977, 303 p. Research Paper R-5.
The ETA-Macro model is designed to estimate the extent of two-
way hnkage between energy and the U.S. economy. It tests the re-
lative strength of the linkage as it responds to new technologies and
other changes in energ}^ supply (real or contrived). The degree to
which one accepts or rejects this model depends on one's opinion of
the "elasticity of substitution'^ between energy and other inputs
to the economy. The proponents of this model believe energy demand
to be relatively inelastic. Thus if one feels cost effective conservation
is relatively easy, one would probably not utilize this model.
ETA-Macro is a single integrated model based on two submodels:
(a) ETA, a process analysis for energy technology assessment; and
(b) a macroeconomic growth model providing for substitution be-
tween capital, labor and energy inputs.
For an overview of ETA-Macro see figure 1.
This model assumes the following :
(1) The impending exhaustion of oil and gas resources — and a transition to
new supply technologies over the next 20-50 years;
(2) Price induced conservation — that is, the possibility of substituting other
economic inputs in place of energy; and
(3) The effects of rising energy costs upon the accumulation of physical capital
in future time periods. ^
In order to focus upon the energ}^ sector, the economy is generally
described in highly aggregative terms. Within the energy sector only
two categories are distinguished — electricity and nonelectric energy.
For the economy wide results this model depends upon four inputs: K,L,E,N —
respectively capital, labor (measured in efficiency units), electric and nonelectric
energy. Assumptions regarding these inputs are as follows:
(a) There are constant returns to scale in terms of these four inputs ;
(h) There is a unit elasticity of suVjstitution between one pair of inputs — capital
(c) There is a unit elasticity of substitution between the other pair of inputs —
electric and nonelectric energy; and
(d) There is a constant elasticity of substitution between these two pairs of
GAS. CCWJl., URANIUM.
EfJERGY COSTS (EC)
FIGURE I. AN OVERVIEW OF ETA-MACRO
» Ibid., p. 2.
» Ibid., p. 5.
The four sets of assumptions being tested in the models presented
here revolve around various degrees of a nuclear growth policy. The
ETA-Macro model results are as follows:
Under base case assumptions prior to the year 2000 (for the most
part provided by the CONAES Modeling Resource group) the macro-
economic effects would be negligible, however after that year they
are projected to be substantial. An annual GNP loss in 2010 of $100
billion is possible. It must be noted that although this number is
large absolutely, it is a relatively small amount of projected GNP
According to this model the crucial economic parameters for U.S. energy-
policy are the elasticity of substitution between energy and other inputs — to-
gether with the rate of growth of the labor force and of its productivity at constant
energy pi-ices. These are the parameters that appear to dominate the long term
This model looks at the big picture, the macro impacts. It is not suit-
able for analyzing specific proposals for energy conservation within
specific sectors. Other models are designed to give that kind of delinea-
The ETA-Macro model in this exercise thus aids us in assessing the
pluses and/or minuses of following or not following a nuclear growth
policy. Is it reasonable to accept slower economic growth as the price
of eliminating possible nuclear hazards? The options as perceived
through the ETA-Macro model are presented, it is left to the policy-
makers to decide.
The second model to be discussed is also composed of two separate
models: the Data Resources, Inc. (DRI) Long Term Interindustry
Transactions Model (LITM), and the Brookhaven National Labora-
tory (BNL) Dynamic Energy System Optimization Model (DESOM).
In this system ''a small macro-model (four sectors plus six energy
sectors) is used to drive a larger interindustry model which in turn
determines the many end use demands in DESOM." ^ Figure 2 depicts
the processes of this model.
The BNL DESOM focuses on the end use demands for energy attempting to
find the cheapest way of meeting them. The model contains only limited ability
to substitute other inputs for energy, but gives a detailed picture of the appropriate
fuel mix for a given level of end use demands. In this study, the DESOM model is
linked to the DRI-LITM model, which, in turn, models the substitution which
occiu's between energy, capital, labor, and four types of materials as a result of
changes in relative input prices. ^
Like the other models this model has many exogenous plug-ins
resulting possibly in the output being determined more by the person
making the run than the model itself.
Of the models discussed in this appendix, this one seems to have
departed most from the CONAES assumptions. The /'alternative
energy form" concept which refers to a possibly unpredicted energy
source (in amount or kind), and associated EMF values are not em-
ployed, since the DESOM-LITM model incorporates:
* Ibid., p. 28.
5 Ibid., p. 285.
« Ibid., p. 280.
Variables representing most of the potential alternative energy supply and
conservation technologies, including a wide variety of sjmthetic fuel, solar, and
conservation technologies (heat pumps, electric cars, etc.). Also, the ''elasticity of
substitution of energy for nonenergy" is not parameterized upon, since, in the
context of the system of models used, the elasticity is determined endogenouslyJ
As other models also show, the quantity of energy consumed during
the early period (thru 2000) does not differ greatly among the four
scenarios, reflecting the long life of already existing capital equipment
and end use devices. However in the post 2000 period great divergence
among the scenarios results.
Lester Lave in the same book criticizes this model as perhaps trying
to do too much with too many unanswered explanations. Lave also
appears to be hesitant regarding the way in which the micro model
seems to predominate the macro modelj
INTEGRATED BW./ORI MOOCL FOR LON« TERM
ENERCY/ ECONOMIC /EMVIRONMENTAL ANALYSIS
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(8f«'t of •e'vMjs Cisco)
Resources for the Future
The RFF/SEAS (Resources for the Future, Strategic Environ-
mental Assessment System) is a system of interlinked models, the
core of which is the University of Maryland's dynamic input-out])ut
model of the U.S. economy, INFORUM. This' model is one which
requires the modeler to make many assumptions not only in the
beginninir but throughout the run. In this way the model becomes
highly subjective. The model is large, depicting 185 sectors. The
end focus of this mcnlel is the onviroiuneiit and it produces monetary
estimates of environmental quality for each year.
In all cases run through this model net energy consumption grows
less rapidly than GNP and the net Btu/GNP ratio falls. Most of the
results are what would ])robably be expected. Coal ])roduction in-
Ibid., p. 4G.
creases quite rapidly in the iiiiconstraiiied cases. The shift away
from electricity to other fuels is most prominent in the constrained
cases due to the assumed ban on new nuclear development and limits
on coal production.
Four difl'erent measurements of environmental impacts have
been developed: pollution residuals, land disturbed, pollution abate-
ment costs and pollution dama<2:e costs. These results are summarized
through a welfare index by subtracting per capita environmental
damage estimates from per capita consumption figures. Table A pre-
sents these computed welfare indices as they appear in the text
of the RFF paper.
TABLE A— CONSUMPTION PER CAPITA LESS ENVIRONMENTAL DAMAGES PER CAPITA (1972 DOLLARS)
Scenarios 1975 1985 2000 2020 2025
A. Unadjusted estimates: <
B. Estimates adjusted for labor productivity losses:
C. Estimates adjusted for labor productivity losses and savings
constraint (Elasticity =0.3):
D. Estimates adjusted for labor productivity losses and savings
constraint (GNP from model):
1 These estimates have been scaled to eliminate the minor differences in the GNP projections that occurred in the model
runs due to targeting.
As these numbers indicate :
The more difficult of the energy scenarios generate signiJBicant losses only in the
cases where a savings constraint is applied. Without such a constraint the economy
appears flexible enough to take quite sizable shocks to the energy sector in its
The RFF modelers note that their model restiictions may be
severe — tiie demand for energy is jDrobabl}^ too high, there is the
possibility of a relaxation on constraints to coal use hi the long run,
stockpiling of oil imports may be looked upon as a sounder policy than
restricting imports, etc. Thus smaller aggregate welfare losses are
However, the m.odelers also suggest that by emphasizing aggregate
losses one overlooks the energy interactions as the}' aflect individuals.
These include such things as income and wealth distributions am.ong
persons, factors of production and geographic regions. Other factors
not considered in the model involve safety, security, and some en-
vironmental consequences which are difficult, if not impossible, to
quantify. The RFF modelers themselves admit that the very items the
model can not deal v;ith quantitativel}^, such as safety and national
security, may 'Svell rule the day" when it comes to decisions by
8 Ibid., p. 171.
The lEA (Institute for Energy Analysis) general equilibrium twa
sector energ\' demand model as developed by David B. Reister and
James A. Edmonds provides long term forecasts of energ}'- demand and
GNP. According to the modelers, this model can be used to study
questions such as: the economic impact of the transition from inex-
pensive energy sources to more expensive energ}" sources; the con-
sequences of modif^dng the historical relationship between growth in
the GNP and growth in energy; or the impact of large increases in the
price of energ}^ on economic growth.^
The IE A model is based on five theoretical assumptions:
A. 1. The economy can be characterized by two sectors: energy and materials.
A. 2. The two fmidamental factor inputs to the economy are capital and labor.
A. 3. Energy is used only as an intermediate good.
A. 4. The materials sector is homogeneous of degree one in its inputs of capi-
tal, labor, energy, and materials, and is assumed to be perfectly competitive (that
is, a douljling of all inputs leads to a doubling of all outputs).
A. 5. The energy sector is not homogeneous of degree one but is characterized
b}'" decreasing returns to scale, and is assumed to be imperfectly competitive. ^°
The authors refer to the model as a parametric (versus econometric)
model because the theoretical structure of the model and the values of
the parameters which control the model have been determined b}^
assumption and not by econometric methods. The major assumptions
plugged into the model are then just that — assumptions. Models treat
the assumptions as fact — thus the source of error is not the model but
the degree to which we cannot see the future.
According to the results of this model, reduction in energy demand
(based on the given assumptions) does not require an equal reduction
in GNP. These runs also indicate that ''substantial" energy conserva-
tion is possible in the elastic case. ''Since fewer resources are needed
to produce energy the elastic case provides more GNP for both the
free supply and constrained suppl}^ assumption." ^^
The lEA model gives great attention to demographic changes. It is
this that tends to lead to lower growth rates for energy use in this
versus the other models.
The authors conclude that the transition from cheap energy to
expensive energy will have a substantial but not catastrophic impact
on GNP, even for the case with tight coal and nuclear constraints.
Furthermore, the impact is substantially reduced if the economy can
freely substitute one factor of production for another.
Lester Lave, in his critique finds this model, like ETA-Macro,
"aggregates the 95 percent of the economic activity (which is other
than energy) into a few sectors, while displaying detail on the energy
jjortion." Lave also finds fault with the energy pricing mechanism.
"* * * The authors decided to treat energy pricing simply and to
set price equal to average (versus marginal) cost * * * It means that
energy prices are biased downward * * * and thus that energy use
is likely to be biased upward." He concludes that one must approach
results of such a model with great caution. ^^
» Ibid., p. 199.
1" IbUl., p. 200.
" Ibid., p. 20:'..
" Ibid., pp. 285-6.
UNIVERSITY OF FLORIDA
1262 05602 3814
The table below presents a brief characterization of the four sce-
narios run by each model. Primary ener^}^ use is shown in cpnids —
prices of petroleum, natural gas and electricity in dollars per million
Btu or index numbers. Total consumption in the economy is shown in
billions of dollars (using various years as a base). Although the
numbers a})pear to be comparable, Hitch notes this is not always
possible and is done only at the reader's own risk.
As was noted earlier there is little variance in primary energy use
across the models and scenarios through the year 2000; however,
this changes considerably between 2000 and 2020 since the constraint
on resources is binding. Perhaps more important is that total con-
sumption in the economy in billions of dollars varies little across
the four cases even w^hen extended through 2020. This seems to imply
a great flexibility in the economy wdien it is given sufficient time
COMPARISON OF MODELS
Primary energy use:
Price of liquids:
lEA (index number)
Price of natural gas:
ETA-Macro- 0. 80
lEA (index number)
Price of electricity:
ETA-Macro 3. 22
lEA (index number)
lEA (1967 dollars) 490
RFF with savings constraint (Elas-
ticity equals 0.3) 678
RFF with savings constraint (GNP
from model)- 678
C/pop less environmental dam-
age— RFF 2,947
107 104 126
"134 lie' 149
124 112 171
2. 70 2. 80 3. 30
"2."67""2."67" 2.' 59
5. 10 5. 70 5. 10
2. 70 2. 80 3. 30
"i.'79""2."84" 2." 17
4. 54 4. 30 4. 54
6. 36 6. 80 6. 48
1.27 1.39 1.56
8. 30 9. 50 8. 30
2, 795 2, 790 2, 763
1,511 1,457 1,484
1, 663 1, 668 1, 649
1,530 1,512 1,500
1,248 1,171 1,200
6, 136 6, 102 6, 122
118 151 119 192 165
112 195 134
148 203 148 292 232
3.30 5.00 5.00 5.00 5.00
4.27 4.95 11.46
9.47 5.17 9.47 5.17 9.47
3.30 5.00 5.00 5.00 5.00
4.54 5.24 12.58
8.84 4.54 8.84 4.54 8.84
9.88 6.68 11.87 7.21 11.75
16.24 10.49 15.37
15.61 8.70 15.61 8.70 15.61
2,757 4,375 4,304 4,244 4,109
1,727 2,928 2,297
1,633 2,652 2,586 2,650 2,492
1,419 2,609 2,471 2,548 2,336
1,044 2,324 1,952 2,096 1,466
6,090 8,874 8,567 8,820 8,440
» Includes private consumption plus government.
Ue: Unconstrained development of resources and 0.75 elasticity of substitution.
Ce: Constrained development of resources and 0.75 elasticity of substitution.
Ui: Unconstrained development of resources and 0.25 elasticity of substitution.
Ci: Constrained development of resources and 0.25 elasticity of substitution.
Electricity prices, as one would expect, show substantial differ-
ences between the constrained and unconstrained cases w^hen drawn
out to 2020. This indicates that:
The variation in resource availability is more important than the variance in
the elasticity of substitution. When the constraints on coal, oil shale, and nuclear
reactors are lifted, the value of the elasticity of substitution makes little difiference.
Thus if we can learn either to mine and burn these fuels cleanly, or learn to live
with a polluted environment, there is little indication of an energy problem in the
United States by 2020. However, the combination of constrained resources and a
low elasticity of substitution indicates an energy problem by 2020. ^^
The models and scenarios indicate there are two main questions —
the first is the elasticity of substitution, and the second is the extent
to which energy is expected to be curtailed. Without a more definite
handle on elasticity, the credibility of basing decisions on model results
is subject to question. To a degree the elasticity problem is a product
of an uncertain regulatory framework. If this were more definite, the
choices would be clearer, and the substitutions that had to take place
in the long run, would. This seems to imply that the economy could
adjust in good stead over the long run, given free market price signals.
By not allowing the economy sufficient time to adjust as mandated by
''correct" price signals, Government policies which appear to some in
our best interests now, ma}^ prove detrimental in the long run. The
bottom line is that the economy must have sufficient time to adapt to
changing situations in order to avoid possible severe consequences.
The foremost conclusion of the model comparison exercise has been
the relative agreement that energy and economic activity need not be
so directly tied as long as the economy and society has sufficient
leeway and time to adjust.
Note. — This appendix is presented as a brief outline of the models,
to aid the reader in becoming more aware of other energy-economy
models. It is a ''state of the art" assessment. The book "Modeling
Energy-Economy Interactions: Five Approaches" as cited earlier,
gives a much more comprehensive view of the models we speak of here.
"Ibid., p. 290.